# Global Asset Allocation and Stock Selection

Campbell R. Harvey

## Assignment 3: Tactical Asset Allocation

### Beginning of Class 8

View this assignment, a real world exercise in top down global asset management. Your team will allocate into at least five global asset classes. You are free to choose the classes (they need not be the same as assignment 2). The classes can be equities or bonds. The objective of the analysis is to provide the inputs necessary to choose optimal portfolio weights.

I expect that you will provide me with a minimum of:

1. Introduction to each market (with some brief background). A discussion of the risk of the market and the economic outlook. Using a common currency base for calculating returns, correlate with the MSCI world equity return or the U.S. return. Estimate correlations over different time periods and plot. Discuss the implications. Discuss the fundamental risks of each market. [Do not just copy some content from some Internet site. I want your analysis.]
2. You will need to collect some predictive variables. Part of the assignment is finding interesting data. . State clearly the economic reasons why you are choosing each variable that will be used in the prediction of the asset return. Please note that if the variable does not work, that is interesting too.
3. Summary of predictive regressions (your best model for each asset class). Use monthly data and common base currency returns. Try to get as much of a history as is possible [data from 1970 is available from MSCI and the updated file resides in the data directory on the student drive]. Be sure to report diagnostics like Durbin-Watson statistics and adjusted R2 and t-ratios for each coefficient. Discuss the sign of each coefficient and whether it matches your intuition. Provide a correlation matrix of the variables in your model [correlation of the variables not the correlation of the coefficients]. I do not want any regression output dumped into the assignment. You can, however, provide an appendix summarizing the alternative models that you examined (but no output).
4. In-sample analysis. For each asset class, provide:
a. Raw correct direction count and percentage. [If you forecast a positive (negative) return and the realized return is positive (negative), that is a correct direction.]
b. Time-series plots of forecasts and actuals.